Source: Company
General Growth Properties (NYSE: GGP) is one of the largest mall operators in the United States. Owning General Growth Properties is pretty much a big bet on the resurgence of U.S. consumer spending which could provide significant boosts for GGP's funds from operation (FFO) and dividend growth.
Net operating income growth, occupancy increases, potential acquisitions and portfolio development are all approaches with which General Growth Properties can create value for shareholders. In addition, investors get to enjoy a 2.5% dividend yield which will likely increase in the future.
Rebounding consumer spending
It has been said before, but it is worth repeating: U.S. GDP growth depends on the loose wallets of the American consumer.
Source: Tradingeconomics
More than any other country, the United States depends on consumer spending to keep the economy and job growth going.
Consumer spending has recovered significantly from the lows in 2008 and higher job growth and income gains will immediately translate into higher discretionary income to be showered on malls across the United States.
The cycle of spending and earning income is what fuels economic growth and General Growth Properties. Through its diversified asset footprint, the company should be able to benefit nicely on a broad based recovery in the U.S. economy. With cyclical tailwinds ahead, investors in GGP have a lot to look forward to.
Diversified property footprint
General Growth Properties owns and operates 120 regional malls with a presence in 40 states. The REIT is the second largest retail property REIT in the sector after Simon Property Group with a market capitalization of $21 billion.
Source: General Growth Properties Investor Presentation, Q2 2014
The consistent rebound in U.S. consumer spending since 2009 certainly is an encouraging signal that customers are exercising less restraint when it comes to their shopping tours. The primary beneficiary: Mall investors like General Growth Properties, among many other retail outlets,
Consumer confidence certainly is high and could increase even further with continued employment gains.
General Growth Properties' 2013 results have already highlighted meaningful improvement in the REIT's financial performance -- and if good news from the consumer spending front continue to trickle in, I wouldn't be too surprised if the REIT increases its optimistic outlook going into 2015.
Strong underlying business performance
General Growth Properties has achieved healthy 2013 results which included 6% year-over-year same store net operating income growth and an 18% increase in FFO.
The REIT's FFO per share trend is encouraging and funds from operations have increased 20% since 2011. More importantly, the REIT expects continued FFO momentum and a 13% y-o-y increase in its FFO to $1.31 per share.
General Growth Properties' dividends also have regularly been more than handsomely covered by its FFO.
Source: General Growth Properties Investor Presentation, Q2 2014
Dividends
General Growth Properties currently pays investors $0.15 quarterly per share which equates to a dividend yield of 2.5%. If the REIT indeed benefits from continued NOI and FFO growth momentum (GGP expects full-year 2014 NOI growth of 4.0-4.5%), further dividend hikes will be likely and investors could see a dividend yield of 3% sooner than later.
Valuation
As illustrated above, General Growth Properties expects a 2014 FFO of $1.31 per share, which works out to an 18x FFO multiple.
Given GGP's focus on class A and B+ malls, the strongest performance malls across the retail property spectrum, and its high dividend coverage ratio of 2.2x (2014 FFO/dividend), the valuation remains reasonable.
The Foolish Bottom Line
Real estate is cyclical, and this is especially true for malls. Going forward, I generally expect the real estate asset class to do well and benefit from higher consumer spending and NOI growth.
Wits its focus on high-quality mall properties throughout the United States, General Growth Properties is a diversified, low-risk bet on increasing FFO and dividends.
